Everyone's Getting Creamed On Their Hedges

Yesterday we mentioned the
$2 billion loss incurred by Chinese investment group Citic,
after one of its units made some unauthorized bets on the
Australian Dollar. This is part of a bigger trend.
The Wall Street Journal notes today that a host of companies,
many located in Latin America, have incurred big losses from
currency bets gone awry:

In Brazil, the growing list of blue-chip casualties includes
paper-pulp giant Aracruz Celulose SA and industrial conglomerate
Grupo Votorantim. In Mexico, trading in tortilla maker
Gruma's stock was halted earlier this month after its
potential losses mounted to $684 million.

The surprise disclosures have sent stock prices tumbling, and
regulators in both countries are investigating whether companies
adequately disclosed their trading risks to investors.

Some local reports have speculated that the damage in Brazil
alone could exceed $30 billion and may affect two hundred
companies.

Of course, the natural question is whether these companies were
hedging against a change in currency prices, or whether they got
caught trying to squeeze extra profits from their currency market
actions. It's probably not such a binary choice.

Meanwhile, outside of the currency realm, the pattern persists.
Southwest and
UAL both booked big losses this quarter due to oil hedging.
Ethanol producers
got slammed when corn reversed direction and moved lower.
Next time around, perhaps, a little more subtlety and
sophistication in these positions is called for.